Updated federal children's online privacy rules go into effect in July. Developers of games and other mobile software are still figuring out how to comply: They must balance their desire to tap the lucrative kids' market and the increased regulatory headache of targeting children.

ENLARGE

Kids love Angry Birds, but will Angry Birds love them back?
Rovio

The biggest problem: data-collection practices that have become routine in the app industry could run afoul of the new rules when used in kids' apps.

Japanese mobile games giant Gree Inc.36320.97% and the U.K. company behind the popular kids' website Moshi Monsters are scaling back plans to jointly build apps as they figure out how to adjust to the new rules, according to Moshi Monsters executive Rebecca Newton.

The company that manages the rights to the cartoon cat Garfield is contacting nearly two dozen app developers who use the character's likeness to make sure they comply, and is considering asking for lawyers' letters from new licensees certifying that that is the case.

And big app developers like Rovio Entertainment Ltd., the Finland-based gaming juggernaut that built "Angry Birds," face a difficult question: Will the presence of cute, kid-friendly characters in their games mean they need to comply with the strict new regulations, even if they claim that they target people of all ages?

The Federal Trade Commission, which enforces the children's online privacy law, has signaled that it may interpret broadly what constitutes a kids' app.

"It would be a good idea to be aware of the rule if you're designing an app that has cartoon characters in it," said Peder Magee, an FTC attorney.

A Rovio spokeswoman declined to comment.

Morgan Reed, executive director of industry group Association for Competitive Technology, said the rules could dissuade developers from building games like "Angry Birds," for fear of the burdens that come with being classified as a kids' app.

"You have to put a lot of processes in place that are expensive and time-consuming," said Ms. Newton, chief community and safety officer for Moshi Monsters owner Mind Candy.

Jeffrey Chester, an online privacy advocate, criticized app-industry officials for "crying wolf" about how much the new rules will hurt them. He said the kids' entertainment industry has been given a boost by the popularity of mobile devices, which have created new ways for marketers and entertainment companies to reach a young audience.

ENLARGE

"This is all about trying to get the FTC to weaken common-sense safeguards to better protect kids' privacy," Mr. Chester said.

Regulators spent much of the last two years soliciting comments from entertainment companies, app developers, consumer groups and others about how to best update the way the government enforces the Children's Online Privacy Protection Act of 1998, or Coppa, a federal law that prohibits Web services from collecting personal data from children without parental consent.

The FTC can seek civil penalties against Coppa violators, and in the past has won settlement payments as high as $3 million.

In the law's early years, Coppa was relatively simple to enforce: Regulators cracked down on websites that asked kids for emails, home addresses and phone numbers without first checking with their parents.

But the explosion of smartphone and tablet games complicated the picture. Children are big users of those devices and are picking them up at very young ages. The devices have expanded the range of information that can be harvested, from device usage patterns to location data to photos and videos.

Related Video

Mobile apps are a new, popular, and unregulated way to market candy and soft drinks to children. WSJ's Anton Troianovski reports. Photo: Scott Lewis for The Wall Street Journal. (9/17/2012)

Video published on 9/17/2012

In December, the FTC officially adopted changes to its Coppa rules. Location information and images of kids collected by phones would be considered personal information, the commission said, as would data that could be used to track device usage over time, especially if that data then informs targeted advertising. The new rules go into effect July 1.

For app developers, the business model that underpins many free apps relies on data collected from users. Software embedded in apps sends that data automatically to third parties, which send aggregated data back to developers to improve their apps and to advertisers hoping to target the millions of smartphone and tablet users more precisely.

PlayTales, a popular storybook app developed by Genera Mobile Solutions SA of Seville, Spain, sends data about its users to one of the most popular mobile data collectors, Flurry. In return, Flurry provides statistics about how PlayTales is used to Genera, free.

Flurry also uses the data it collects from mobile apps to help advertisers target specific kinds of consumers, from "value shoppers" to "auto enthusiasts."

Kate Shoaf, a PlayTales spokeswoman, said the company learned from Flurry data that most of their users were logging on around 8 p.m., prompting the company to add more bedtime stories and lullabies.

But now PlayTales is trying to move away from using Flurry and figure out how to collect data on its own because of Coppa concerns. Flurry's terms of service bar apps that are directed at children from using its software—something that Ms. Shoaf said PlayTales hadn't known.

Peter Farago, Flurry's vice president for marketing, said the company has looked into developing a version of its service that complies with Coppa but has no immediate plans for releasing a version for kids' app developers. Such a service, he said, would probably be "greatly stripped down."

The FTC's Mr. Magee said the commission will provide more information soon to help developers understand how to comply with Coppa. Commission officials have said they expect the industry to develop technology that will streamline the process of obtaining parental consent and have promised to work with the private sector to make sure those tools comply with Coppa.

Mind Candy announced plans last year to develop two Moshi mobile games in partnership with Gree.

But Ms. Newton said the two companies now plan to release just one mobile app, "Moshi Monsters Village," and have dropped plans for another, "Moshi Monsters: Lost Islands."

One reason for scaling back, according to Ms. Newton: the complexity of dealing with the new Coppa, particularly the rules about third-party data collection and advertising.

Paws Inc., which owns the rights to Garfield, is playing it safe. Madelyn Ferris, who oversees Paws' digital business, said she has found that many of the app developers who have licensed Garfield don't understand the implications of the new Coppa rule. So she is contacting about 20 of them to make sure.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.